Analysis: O&G Reserves Grow Despite Upstream Spending Decline

All categories of upstream spending declined in 2009 and total costs incurred fell 47 percent from $139.8 billion in 2008 to $73.4 billion in 2009, Ernst & Young reported in its U.S. E&P Benchmark study of the exploration and production results of 50 companies from 2005 to 2009.

Spending was impacted by the declines in oil and gas prices and by lingering issues in the credit markets. Total costs incurred plummeted in 2009 by 47 percent from $139.8 billion in 2008 to $73.4 billion in 2009.

Revenues declined 36 percent in 2009 to $122.3 billion and after-tax profits dropped 97 percent to $1.3 billion in 2009. The 36 percent revenue decline was price-driven, as combined oil and gas production rose seven percent in 2009. Integrated oil and gas companies posted after-tax profits of $11.5 billion, while the large independents and independents had losses of $4.2 billion and $6.0 billion respectively.

Despite the decline in upstream spending and revenues, the number of proved U.S. oil and natural gas reserves grew during this time period. Oil production was 1.3 billion barrels in 2009, an increase of 10 percent from 2008. The 2009 oil all sources production replacement rate was 157 percent, while the three-year average for 2007-2009 was only 98 percent.

Gas reserves grew four percent in 2009 to 156.6 Tcf, despite negative revisions of 9.1 Tcf. Gas production has grown 38 percent since 2005 and was 11.9 Tcf in 2009. The gas all source production replacement rate was 153 percent and the three-year average for 2007-2009 was 188 percent.

Ernst & Young noted that the U.S. Securities & Exchange Commission's file rule effective Jan. 1, 2010 now requires companies to estimate proved reserves using the 12-month average beginning-of-month price for the year, rather than year-end prices. The rule also limits the booking of proved undeveloped reserves to reserves scheduled for development within five years, unless specific circumstances justify a longer time.

As a result of the five-year requirement, some reserves previously classified as proved undeveloped were reclassified in 2009 as unproved reserves, resulting in the recording of negative revisions.

Despite the rule change, Ernst & Young reported that positive revisions of 924.4 million barrels were reported for oil reserves in 2009, and end of year reserves increased five percent to 16.2 billion barrels.

Exploration costs saw the smallest decrease of all categories of spending, declining 13 percent from $16.6 billion in 2008 to $14.4 billion in 2009. Development costs fell 34 percent from $68.0 billion in 2008 to $45.0 billion in 2009.

For the first time in the five-year period, production costs decreased in 2009 to $10.95 per BOE. Proved reserve acquisition costs were $10.29 per BOE in 2009 and reserve replacement costs were $13.22 per BOE. Proven reserve acquisition costs were $10.29 per BOE in 2009 and reserve replacement costs were $13.22 per BOE.

Proved property acquisition costs declined 78 percent from $20.6 billion in 2008 to $4.5 billion in 2009. SandRidge Energy reported the largest proved property acquisition costs of $749.1 million, primarily related to the purchase of Permian Basin properties. Denbury Resources made acquisitions of potential tertiary recovery properties in Texas and posted total proved property acquisition costs of $585.6 million.

Unproved property acquisition costs fell 72 percent from $33.4 billion in 2008 to $9.3 billion in 2009. Both Chesapeake Energy and Plains Exploration & Production had unproved property acquisition costs of over $1 billion related to the acquisition of Haynesville and Marcellus shale gas acquisitions.

Seven companies increased their combined exploration and development spending last year, including Plains, Comstock Resources, Concho Resources, EQT, ExxonMobil, Petrohawk Energy, and Royal Dutch Shell.


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